ASB economists suggest that the New Zealand economy may have mostly weathered its worst phase.
In their newly released quarterly economic forecasts, they highlight that declining oil prices are enhancing the economic outlook and lowering the risk of another extended inflation period for the country.
The economists noted that the economic outlook has “markedly” improved over recent months, showing a significant change from their previous forecast in March.
Chief economist Nick Tuffley remarked, “The New Zealand economy has shown greater resilience than many expected in the face of global uncertainty and higher fuel prices.”
“Although geopolitical risks remain high, the drop in oil prices has considerably lessened one of the major threats to growth and inflation this year.
“Evidence was mounting that the economy was realigning in the latter part of last year and the early part of this year, until the Middle East conflict erupted. Now that the main disruption appears relatively brief, we anticipate a return to normalcy, with people resuming regular activities and decision-making.”
Tuffley added that, despite continued disruptions in the Strait of Hormuz and damage to energy infrastructure, recent fuel price declines have eased inflationary pressures and alleviated the financial strain on households.
“Rising fuel prices were beginning to suppress household spending and increase business costs across the economy. These pressures are now significantly diminishing.
“Consumers are likely to feel more optimistic than earlier in the year, and businesses have a clearer understanding of their cost environment.”
The gross domestic product (GDP) rose by 0.8 percent in the March quarter, with indications of stronger growth than previously anticipated.
“The recovery has not been derailed, but it has been delayed. Household spending, business investment, and some export sectors continue to feel the impact of the oil shock, and the labor market remains soft.”
Tuffley noted that fuel prices and increased uncertainty would continue to be significant factors through the middle of the year. Inflation, as measured by the consumer price index, is expected to rise to about 4.1 percent by June, then ease in the latter half of the year and into 2027.
ASB anticipates a gradual recovery, supported by strong commodity prices, recovering tourism, and reduced fuel costs, despite ongoing geopolitical risks. The dairy and meat export sectors are benefiting from robust global demand, while tourism has rebounded to 93 percent of pre-Covid levels.
“The inflation outlook remains highly uncertain and is heavily influenced by developments in the Middle East, but the recent drop in oil prices makes inflation appear much less daunting than it did a few months ago,” Tuffley stated. “The outlook has improved, but uncertainty remains high.
“A single significant geopolitical event could undo recent progress, so businesses and households should be prepared for various outcomes. For now, though, the recovery seems back on track.”
Tuffley suggested that households might start feeling more optimistic as fuel costs decrease.
“Uncertainty is something we naturally dislike. When faced with unknowns about duration and resolution, we tend to be more cautious.
“While resolving conflicts like those we’ve witnessed is complex, there is some reassurance in knowing that enough agreements will likely be reached to ensure some oil supply, maintaining downward pressure on prices.
“This is providing more certainty for decision-making, whether for households or businesses.”
He mentioned that the Reserve Bank might not be as concerned about inflation.
“The urgency to raise interest rates as early as Wednesday seems less compelling at this point. We anticipate the Reserve Bank will hold off on increasing rates until at least September.”
He projected that the official cash rate would likely return to 3.25 percent.
“That’s our best estimate of where that sort of Goldilocks neutral rate is.”
